NPS: How to avail Tax Benefits on Income Tax under NPS

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National Pension System or NPS is designed to save towards post retirement years by making contribution during the work life. Income tax benefits are one of the key advantages of investing in NPS, which is open for both salaried and self-employed. NPS offers two of accounts: Tier I and Tier II. Investment in Tier I account gets a number of income tax benefits but subscribers cannot withdraw till the person reaches the age of 60. Partial withdrawal and premature exit is allowed in specific cases and How to avail income tax benefits available under the NPS scheme.

Recently, the government approved a proposal to make NPS more attractive for subscribers by making a withdrawal from NPS completely tax-free.

Types of NPS accounts

  • Tier 1 – Tier 1 NPS account is strictly a pension account which doesn’t allow withdrawals
  • Tier 2 – Tier 2 account is known as an investment account. This is a voluntary saving account associated with Permanent Retirement Account Number (PRAN). 

Tax benefits are applicable for investments in Tier I account only. There is no tax benefit on investment towards Tier II NPS Account.

Tax Benefits on Income Tax under NPS

  •  Tax benefit under 80CCD (1B): For salaried as well as self-employed, investment of up to Rs 50,000 in Tier 1 NPS account in a financial year qualifies for tax deduction under Section 80CCD (1B) of the Income Tax Act.
  • This Rs 50,000 extra tax deduction is in addition to the  1.5 lakh allowed under Section 80CCD (1) for investment towards NPS.
  • Also, the deduction under Section 80CCD (1) is available to both salaried individuals and non-salaried individuals.
  • The total amount of deduction under sections 80C, 80CCC (investment in pension plan offered by an insurer) and Section 80CCD (1) (for NPS) cannot exceed Rs. 1.5 lakh in a financial year.
  • For salaried individuals, the maximum deduction allowed under Section 80CCD (1) is 10% of their salary for that year and for non-salaried individuals, it is 20% of gross total income for that year.
  • Therefore, an individual can claim an income tax deduction benefit of up to  2 lakh:  1.5 lakh under Section 80CCD (1) and  50,000 under section 80CCD (1B).
  • In additional tax benefit, the benefit of the employer’s contribution is given as deduction to the individual salaried employee under Section 80CCD (2).

How to avail Tax Benefits on Income Tax under NPS:

An existing subscriber can approach any Point of Presence- Service Providers (POP-SP) or alternatively can visit NPS website for making an additional contribution in the Tier I account.

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The subscriber can submit the transaction statement as an investment proof. Alternatively, a subscriber from “All Citizens of India” can also download the receipt of voluntary contribution made in Tier I account for the required financial year from NPS account log-in. It can be downloaded from the submenu “Statement of Voluntary Contribution under National Pension System (NPS)” available under the main menu “View” in NPS account log-in.